Question

Harper,  Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $320,500 in cash. The book value of Kinman's net assets on that date was $620,000, although one of the company's buildings, with a $78,400 carrying amount, was actually worth $133,650. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $126,000.

Kinman sold inventory with an original cost of $79,800 to Harper during 2017 at a price of $114,000. Harper still held $20,550 (transfer price) of this amount in inventory as of December 31, 2017. These goods are to be sold to outside parties during 2018.

Kinman reported a $56,400 net loss and a $22,200 other comprehensive loss for 2017. The company still manages to declare and pay a $30,000 cash dividend during the year.

During 2018, Kinman reported a $61,000 net income and declared and paid a cash dividend of $32,000. It made additional inventory sales of $128,000 to Harper during the period. The original cost of the merchandise was $80,000. All but 30 percent of this inventory had been resold to outside parties by the end of the 2018 fiscal year.

Prepare all journal entries for Harper for 2017 and 2018 in connection with this investment. Assume that the equity method is applied. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.)

• 1

  Record the initial investment.

• 2

  Record the dividend declaration.

• 3

  Record the receipt of dividend.

• 4

  Record the accrual of income and OCI from equity investee, 40% of reported balances.

• 5

  Record the amortization relating to acquisition of Kinman.

• 6

  Record the defer unrealized gross profit on intra-entity sale.

• 7

  Record the dividend declaration.

• 8

  Record the receipt of dividend.

• 9

  Record the 40% accrual of income as earned by equity investee.

• 10

  Record the amortization relating to acquisition of Kinman.

• 11

  Record the recognized income deferred from 2017.

• 12

  Record the deferred unrealized gross profit on intra-entity sale.

Answer 1

Consideration Transferred Fair Value of Kinman (320,500 / 40%) less: Book Value of Kinman Excess of Fair Value Over Book Value 320,500 801,250 (620,000) 181,250 Useful life [B] Initial Value Allocation of Excess Value to Specified Assets [A] Buidling (133,650 - 78,400) 55,250 Royalty 126,000 Total 181,250 share of Harper In Amortization expense [C 40%] 2,210 2,520 4,730 Amortization per year [C= A/B] 5,525 6,300 11,825 10 20 Calculation of Deferred profit on Intercompany Inventory sale Gross Profit [C = A-B] Transfer price Year [A] 2017 114,000 2018 128,000 * Ending Inventory of 2018 (128,000 x 30%) 38,400 [E] Cost price [B] 79,800 80,000 Ending Inventory Held Deferred Profit [F= (D xE)] 20,550 6,165 38,400 14,400 Profit Percentage [D= (C/AⓇ 100)] 30.00% 37.50% Share of Harper in Deferred Profit (F x 40%) 2,466 5,760 34,200 48,000

No Credit Debit 320,500 1 Date General Journal 01/01/2017 Investment in Kinman Co. Cash (to record initial investment) 320,500 2 12,000 12/31/2017 Dividends Receivable Investment in kinman Co. (to record dividend declared by Kinman) (30,000 * 40%) 12,000 3 12,000 12/31/2017 Cash Dividends receivable (to cash receipt of dividend) 12,000 4 22,560 8,880 12/31/2017 Equity in Kinman Income (loss)(56,400 x 40%) Other comprehensive loss of Kinman (22,200 x 40%) Investment in Kinman Co. (to record accural of Income and OCI from Kinman) 31,440 5 4,730 12/31/2017 Equity in Kinman Income Investment in Kinman Income (to record amortization expenses of Acquired assets) 4,730 6 2,466 12/31/2017 Equity in Kinman Income Investment in Kinman Income (to record defer unrealized grossprofit on inter entity sale) 2,466

7 12,800 12/31/2018 Dividends Receivable Investment in kinman Co. (to record dividend declared by Kinman) (32,000 * 40%) 12,800 8 12,800 12/31/2018 Cash Dividends receivable |(to cash receipt of dividend) 12,800 9 24,400 12/31/2018 Investment in Kinman Co. Equity in Kinman income (to record equity income from kinman) (61,000 * 40%) 24,400 1 10 4,730 12/31/2018 Equity in Kinman Income Investment in Kinman Income (to record amortization expenses of Acquired assets) 4,730 2,466 11. 12/31/2018 Investment in Kinman Co. Equity in Kinman income (to recognize deferred profit of 2017) 2,466 12 5,760 12/31/2018 Equity in Kinman Income Investment in Kinman Income (to record defer unrealized grossprofit on inter entity sale) 5,760